Alberta energy royalties and carbon policy back under the microscope

First, a change to the energy regulator, then acarbon tax change, now a royalty review. Itwas a busy week for Alberta's new government and a week full of uncertainty for the energy sector.

On Friday morning, Alberta's Energy MinisterMarg McCuaig-Boydannounced the beginningof the provincial government's royalty review.

Dave Mowat, the chief executive of ATB Financial, a provincially owned bank, will lead the panel, which willsubmit a report togovernment bythe end of the year.

The announcementwas scant on details. There are no terms of reference andno other panel members have been named.

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Climate policy and royalty review to be integrated

What was made clear in the announcement is that the royalty review and the climate strategy panel announced on Thursdaywill be designed in tandem.

"We've been encouraged both by the premier and by industry to look at industry as a whole," said McCuaig-Boyd.

In practical terms, that means the government will be cautious about imposing new costs on industryina time when profits are essentially non-existent.Analysts suggest that any increase in carbon taxeswill cause a decrease in the amount of royalties that a company has to pay.

"You're sort of scavenging," said David Sawyer, an environmental economist withEnviroEconomics.

"You're cannibalizing with no net change. You're reducing your royalty payments because your carbon costs have gone up. So the government's position isn't necessarily better off as a result."

That should be comforting to Alberta's energy industry, but it remains cautious.

The Canadian Association of Petroleum Producers said in a statement thatthe new climate change rules and price on carbon, plus Alberta's recent corporate tax increase have the potential to add almost $800 million to industry costs over the next two years, which puts investment and jobs at risk.

"We think any royalty review needs to take into account all the changing costs that are coming to our industry," said TimMcMillan,presidentofCAPP, "whether theybe the corporate tax changes or the future panel on carbon."

Election promises

During the election campaign, the NDP said it would conduct a careful review of Alberta's royalties, to ensure a "full and fair return to the people of Alberta.

That left the impression that the NDP felt that Albertans were not getting their fair share, although McCuaig-Boyd wouldn't commit to that.

"There was a concern from Albertans are we getting our fair share, could it be different, couldit be better?So we're delivering on thatpromiseand reviewing."

Alberta's current energy royalty regime iscomplex, based on the price of oil and natural gas, the age of a particular well and its monthly production. When oil prices are high, Alberta can collect up to a 40 per cent royalty from a well. When prices are low, that royalty can drop to zero.

Oilsands royaltieslargely depend on whether the project has earned back its capital costs.

Competition from Saskatchewan

Saskatchewan politicians have been eagerly courting Alberta energy companiesto move investment dollars one province over.

McCuaig-Boyd said she is not losing sleep over that possibility. "In talking to industry, I don't get that sense. They're excited about knowing the outcomes from this, and I think that they're willing to wait. I was talking to the president of Imperial Oil yesterdayand that was the sense I got from him. They want to know the answer, but are willing to let the process unfold."

For a time, that's likely true.

"From our point of view, both of those [climate strategy and royalty review]are creating uncertainty for our members' ability to raise capital to invest in our economy here in Alberta,said McMillan of CAPP.

"So having them movingforward in a timely matter is important."